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Titan: Jewel in the crown - Views on News from Equitymaster

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Titan: Jewel in the crown
Oct 24, 2009

Performance summary
  • Titan Industries report tepid growth of 5.4% YoY in 2QFY10, led by growth in jewellery sales. Lower growth of other segments restricts topline growth.
  • Operating profits decline by 14.3% YoY as costs grow at a faster rate as compared to topline.
  • Dismal show at the operating level led to 11.6% YoY decline in net profits.


Financial performance snapshot
(Rs m) 2QFY09 2QFY10 Change 1HFY09 1HFY10 Change
Net sales 10,885 11,468 5.4% 18,988 20,296 6.9%
Expenditure 9,623 10,387 7.9% 17,167 18,422 7.3%
Operating profit (EBDITA) 1,262 1,081 -14.3% 1,822 1,874 2.9%
EBDITA margin (%) 11.6% 9.4%   9.6% 9.2%  
Other income 14 32 128.1% 24 42 75.9%
Interest 58 50 -13.3% 104 126 21.9%
Depreciation & amortisation 79 89 13.2% 156 179 14.6%
Profit before tax 1,139 974 -14.5% 1,586 1,611 1.6%
Tax 261 198 -24.3% 381 375 -1.7%
Profit after tax 878 776 -11.6% 1,205 1,236 2.6%
Net profit margin (%) 8.1% 6.8%   6.3% 6.1%  
No. of shares (m)       44 44  
Diluted earnings per share (Rs)*         36.5  
P/E (x)         37.3  
(*trailing twelve month earnings)

What has driven performance in 2QFY10?
  • Titan Industries’ revenues grew by merely 5.4% YoY on account of 9.4% YoY growth in the company’s jewellery business, which contributes 70% to the topline. Higher gold prices have impacted customer walk-ins during the quarter ended September 2009. However, with the onset of festive season, jewellery segment continued to support overall growth report in 2QFY10. The time products segment and other segments that include eyewear, precision engineering and machine building and clocks hampered the overall growth of the company. Titan Industries watch sales declined marginally by 2.6% YoY, while other segment revenues came in lower by 7.2% YoY. Precision engineering division witnessed decline in sales on account of cancellations and postponements of orders by international customers owing to the global economic downturn.

  • The growth of the Titan’s business is linked to discretionary spending by consumers. In times of economic slowdown, discretionary spending is the first one to take a hit. Despite being in such a business which is vulnerable to economic cycles and spending behavior, the company continues to grow on account of its ability to understand changing consumer preferences and ability to accordingly streamline its products.

  • The operating profits declined by 14.3% YoY on account of higher raw material costs and employee costs. The company has changed its inventory valuation method to reflect accurate and appropriate presentation of the financial statements. This move has led to slower growth in cost of consumption of raw materials. The increase in other cost heads has also exerted pressure on margins. However, the company has not divulged the details for the same. The costs could have been higher as the company is expanding its retail footprint.

  • The change in inventory valuation method and adoption of new principles of hedging and derivative accounting has resulted in higher profit before taxes of Rs 20 m. Also during the quarter the company has been able to lower interest charges and reported more than two-fold growth in other income. However, dismaying performance at the operating level resulted in 11.6% YoY decline in bottomline.

What to expect?
The company’s new initiatives, (prescription eyewear and precision engineering) taken with a view to sweat assets and sustain profitability are expected to improve shareholder returns in future. While these two segments are not expected to contribute significantly to the topline in the coming two to three years, it will help the company sustain profitability in the longer run.

Having said that, if the volatility in gold prices are to continue in the future as well, it might increase risks on the sustainability of jewellery business’ margins going forward. However, since gold prices in jewellery business are pass-through in nature, there is no real concern in case these were to rise gradually in the future. The management has indicated that customers seem to have accepted the present price of gold and are returning to spending on jewellery. The company has also pointed out that slow and steady economic recovery is also supporting the growth.

At the current price of Rs 1,361, the stock is trading at a multiple of 16.9 times our estimated FY12 earnings and leaves limited scope for upside potential. On topline front the company is likely to end the year in line with our expectations. However, on the bottomline front it is likely to outperform our expectations owing to adoption of new principles for more accurate presentation of operational performance. We shall shortly be reviewing our research report on the stock.

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